Dealing with contractual risk within the supply chain

For all the years I can remember, the mantra has been: USE UNAMENDED STANDARD FORMS OF CONTRACT. But, by and large, this has fallen on deaf ears, especially as you proceed along the supply chain

In my experience, over 95% of sub-contracts and sub-sub-contracts are amended standard contracts or bespoke contracts. In 30 years of dealing with contractual and legal issues in the industry, I can only recall one example of the use of an unamended sub-contract.

Risk

Over 85% of the value of construction works is delivered by the supply chain. But the inappropriate allocation of risk generated by amended standard contracts/bespoke contracts (particularly the consequences of this) contributes to the uncompetitiveness of UK construction: UK construction costs are amongst the highest in the EU.

In most sub-contracts, the word ‘risk’ hardly ever appears. It tends to be hidden behind the language of obligations expressed in the use of the verbs ‘shall’ and ‘must’. A good example are provisions on ‘indemnities’ which often create unlimited liability to meet any claims made against the other party ‘howsoever arising’.

Role of Clients

It is often said that clients have little or no interest in sub-contracting arrangements. Having been a client, I’ve always found this difficult to understand. If your project outcomes are dependent on how well your main contractor’s supply chain performs – as they usually are – why wouldn’t you be interested in the composition of the supply chain and their contract terms?

Over 23 years ago, Sir Michael Lathan recommended (in ‘Constructing the Team’) that only suites of contracts be used – rather than having differing sets of contractual arrangements used at all levels of the supply chain.

Influencing Sub-Contracts Terms

The NEC 4 Engineering and Construction Contract gives the Project Manager some control over the use by the main contractor of non-NEC contracts. The Project Manager can object to the use of a bespoke contract if he/she doesn’t think it will enable the main contractor to deliver the works in accordance with the NEC main contract, or doesn’t contain a statement that the parties will act in a spirit of mutual trust and cooperation.

The latter is interesting; I have seen bespoke contracts that transfer all risk to the other party (after all, that is the reason for the contract being bespoke) and yet still manage to have a clause which requires both parties to act in a spirit of mutual trust and cooperation.

The JCT standard building contract has a rather weak provision:

"Where considered appropriate, the Contractor shall engage the sub-contractor using the relevant version of the JCT standard Building Sub-Contract’ (emphasis added).”

If Building Information Modelling can capture, revise and share the specifications for major projects, surely the ‘what we are building’ element of a construction contract is just one step further?

Public Sector Clients

Last year, the Specialist Engineering Contractors’ Group carried out a survey of local authorities in England and Wales to establish the extent that they insist on the use of standard sub-contracts.

In Wales, 31% of local authorities insist on the use of the relevant standard sub-contract; in England, the figure is greater at 39%. Many councils not mandating the relevant sub-contract felt that they should be doing so, but the reasons for holding back were not clear. Some felt that they did not have the right to insist on the use of the standard sub-contract; this was primarily a decision for the main contractor.

Where to now?

It’s very difficult to police the private sector, but we can address the public sector, which should be adopting best practice. The easiest way to do this is to amend the Public Contracts Regulations 2015. The amendment should require all contracting authorities to use industry standard contracts unamended, and insist on the use of the equivalent sub-contract in the suite of contracts being used.

In the overwhelming majority of cases, the ‘suites’ will either be the NEC or the JCT family of contracts. At least, when it comes to the use of taxpayers’ monies, we can avoid the costs associated with the inappropriate transfers of risk and transfers in use of amended standard sub-contracts and bespoke sub-contracts.